DOCSLIB.ORG

Fiscal Councils and Economic Volatility

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Fiscal Councils and Economic Volatility JEL classification: E42, E58, E63, H30 Keywords: dynamic inconsistency, fiscal and monetary policy interaction, independent fiscal council * Fiscal Councils and Economic Volatility Adam GERŠL—Joint Vienna Institute; Czech National Bank (on leave); Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague (on leave) ([email protected]) Martina JAŠOVÁ—Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague ([email protected]), corresponding author Jan ZÁPAL—IAE-CSIC, Campus UAB, (Bellaterra) Barcelona; CERGE-EI, Prague ([email protected]) Abstract We evaluate proposals for an independent fiscal authority put forward as a solution to excessive public spending. Our main conclusion is that shifting the responsibility to set broad measures of fiscal policy from the hands of the government to an independent fiscal council is not necessarily welfare improving. We show that the change is welfare improving if the ability of policymakers to assess the state of the economy does not change. How- ever, if this institutional change involves a considerable decrease of capacity of the new agency to recognize economic shocks, citizens’ welfare can decrease as a result. This is especially significant in times of increased economic volatility such as during the recent global financial crisis. Faced with the ambiguous theoretical result, we try to gain deeper insight by calibrating our simple model. 1. Introduction The global financial crisis affected the fiscal positions of many countries. The main channels were not only direct government involvement in saving the banking system, but also a fall in tax revenues due to the economic slowdown and increased costs of long-term debt. As a result, budget deficits and the level of government debt are increasing. Especially in the EU, some countries such as Greece started to feel the consequences of the badly run fiscal policy of the past as the level of debt and the expected fiscal deficit reached values that could bring the given country almost to the point of sovereign bankruptcy. Given that most of the EU countries employ a common monetary policy (euro area), serious fiscal problems of one of the euro area’s members could possibly endanger the stability of the common currency, the euro. As a reaction to deteriorating fiscal positions that revealed the imprudent fiscal policy of the past, policymakers started once again to discuss the agenda of how to set up a fiscal framework that would prevent accumulation of deficits, especially in good times. One can remember that this discussion was already under- taken by academics and policymakers in the EU in the late 1990s and early 2000s together with the establishment and reform of the EU’s Stability and Growth Pact. The debate at that time emphasized that while a rule-based fiscal policy that includes * Financial support from the Czech Science Foun dation (GACR 402/08/0501 and GACR 403/10/1235) and from the Grant Agency of Charles University (project GA UK No. 564612) is greatly appreciated. We wish to thank several anonymous referees for their helpful comments. The findings, interpretations and con- clusions in this paper are entirely those of the authors and do not represent the views of any of the below- mentioned institutions. 190 Finance a úvěr-Czech Journal of Economics and Finance , 64, 2014, no. 3 deficit or debt limits is desirable, it is difficult to safeguard compliance with the rules if fiscal policy remains in the hands of elected policymakers. Some authors (Poterba, 1996; Strauch and von Hagen, 1999; European Commission, 2003) argued for fiscal policy to be taken from the hands of elected governments and to be vested in the hands of an independent institution. Such an independent institution would set broad measures of fiscal policy such as budget deficits and public debt. Looming fiscal problems in the EU during 2009–2010 that again spurred a decline in economic output due to the global financial crisis led policymakers in the EU to put once more on the agenda the possible role of independent fiscal councils. 1 The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (also known as the Fiscal Compact) came into force in January 2013. The treaty is an intergovern- mental agreement of 25 EU member states 2 and it aims to strengthen fiscal discipline in the EU, including the call for setting up national fiscal councils. From a political economy perspective, crisis periods provide a window of opportunity to change macroeconomic policy frameworks. The experience of Asian countries after the 1997 financial crisis shows that the hard landing the East Asian countries experienced compelled them to implement better macroeconomic and financial policies oriented towards economic and financial stability so that during the recent global financial crisis of 2007–2009 they stayed relatively resilient. However, establishing new institutions and policies such as an independent fiscal council while still in a period of increased economic volatility may also bring some risks (Saint- Paul, 2002). Proposals for independent fiscal councils stem from the same logic, which led to the establishment of an institution comprising independent monetary authorities, i.e. vesting a broad aggregate of fiscal policy in the hands of an independent insti- tution. This newly established authority would be responsible for independent monitoring of fiscal policy. The fiscal council would also set a binding limit on the size of public debt or the budget deficit, while democratically elected govern- ments would decide about the composition of public spending and revenues. The argument is that the independent fiscal authority would not be subject to the short-sighted behavior of elected governments, which leads to spending bias. Also, by focusing solely on the debt or deficit, the independent fiscal authority would not be subject to the public tragedy of the commons. In this paper we argue that setting up an independent fiscal council is a wealth-improving measure under the condition that the institution is able to properly identify shocks (i.e., with at least broadly the same or higher probability than the government, the initial fiscal authority). We construct a microeconomic model of macroeconomic policymaking that always involves two players (govern- ment versus central bank or fiscal council versus central bank) that are uncertain about the actions of the other policymaker. We investigate the claim for an inde- pendent fiscal authority from the point of view of citizens who prefer an optimal and stable economic environment. We show that in a period of higher economic volatility the failure of the fiscal council to recognize shocks has a significant negative effect on the final welfare, which can even outweigh the positive effects of getting rid of 1 See Council of the EU (2010). 2 Of the total 27 at the time, excluding the United Kingdom and the Czech Republic. Finance a úvěr-Czech Journal of Economics and Finance , 64, 2014, no. 3 191 the politically motivated fiscal deficit bias. We calibrate the model in order to be able to quantify the effects in empirical terms. We are able to show that an ill-designed fiscal authority with virtually zero ability to recognize shocks and to optimally react to them that would be established in turbulent times can decrease the general welfare by roughly 20%. The paper is structured as follows: Section 2 relates our work to the existing literature. Section 3 introduces the model, derives its equilibrium and discusses the welfare measure. Section 4 contains our calibration exercise. Section 5 concludes the paper. Derivation of the model equilibrium is relegated to Appendix A1 . 2. Relation to Literature Our work is related to several strands of literature. Most importantly, we investigate the claim of several authors who call for the designation of an inde- pendent fiscal authority as a means of preventing excessive public spending and budget deficits run by elected governments (see the survey in Debrun, Hauner and Kumar, 2009, for a detailed overview of the topic). In this respect, von Hagen and Harden (1994) and Eichengreen, Hausmann and von Hagen (1999) call for a “National Debt Board” and “National Fiscal Council”, respectively. Both institu- tions would be independent, apolitical institutions that would set the maximum allowable increase of government debt in each year, a limit to which a proposed public budget would have to comply. In a similar spirit, Wyplosz (2005) calls for a “Fiscal Policy Committee” that would set the maximum allowable budget deficit. Von Hagen (2003) then proposes a “European Stability Council” as an institution that would focus on changes in public debt. 3 The logic of all of these proposals is to mimic independent central banks on the fiscal side. A newly established council would have a mandate to set a binding limit on the size of public debt or the budget deficit, while democratically elected governments would decide about the composition of public spending and revenues. The independent fiscal authority would address the political failure, which is con- sidered to be the source of fiscal indiscipline (Wyplosz, 2008). In particular, the council would not suffer from the short-sighted behavior of elected governments that leads to spending bias. Furthermore, having a clearly defined objective, the independent fiscal authority would not be subject to the public tragedy of the commons that is due to the fact
Load more

Recommended publications
  • Enhancing Chile's Fiscal Framework
    Enhancing Chile’s Fiscal Framework Lessons from Domestic and International Experience EDITORS Felipe Larraín Luca Antonio Ricci Klaus Schmidt-Hebbel CO-EDITORS Hermann González Metodij Hadzi-Vaskov Andrés Pérez INTERNATIONAL MONETARY FUND Enhancing Chile’s Fiscal Framework Lessons from Domestic and International Experience E D I T O R S Felipe Larraín Luca Antonio Ricci Klaus Schmidt-Hebbel C O- E D I T O R S Hermann González Metodij Hadzi-Vaskov Andrés Pérez INTERNATIONALINTERNA TIONAL MONETARYM O NETARY FUNDFUND © 2019 International Monetary Fund Cover design: Winking Fish Composition: AGS, An RR Donnelley Company Cataloging-in-Publication Data IMF Library Names: Larraín, Felipe, editor. | Ricci, Luca Antonio, editor. | Schmidt-Hebbel, Klaus, editor. | International Monetary Fund, publisher. Title: Enhancing Chile’s Fiscal Framework: Lessons from Domestic and International Experience / editors: Felipe Larraín, Luca Antonio Ricci, Klaus Schmidt-Hebbel / co-editors: Hermann González, Metodij Hadzi-Vaskov, Andrés Pérez. Description: Washington, DC : International Monetary Fund, 2019. | Includes bibliographical references. Identifiers: ISBN 9781513514024 (paper) Subjects: LCSH: Fiscal policy—Chile. | Classification: LCC HC141.P38 2019 DISCLAIMER: The views expressed in this book are those of the authors and do not necessarily represent the views of the IMF’s Executive Directors, its management, or any of its members. ISBN: 978-1-51351-402-4 (English paper) For more information, please visit the Chilean Ministry of Finance’s website at: https://www.hacienda.cl/sala-de-prensa/conferencias-y-seminarios/conferencia-fiscal-ministerio- de.html Please send orders to: International Monetary Fund, Publication Services P.O. Box 92780, Washington, D.C. 20090, U.S.A. Tel.: (202) 623–7430 Fax: (202) 623–7201 E-mail: publications@ imf .org Internet: www .elibrary .imf .org www .bookstore .imf .org 2 Contents ACKNOWLEDGMENTS ............................................................................................................................
    [Show full text]
  • Fiscal Assessment Report, December 2020
    FISCAL ASSESSMENT REPORT Sustaining the Economy through Covid-19 December 2020 1 © Irish Fiscal Advisory Council 2020 978-1-8381309-1-6 This report can be downloaded at www.FiscalCouncil.ie 2 Table of Contents Boxes 3 Appendices 3 Foreword 4 Summary Assessment 6 1. Assessment of the Fiscal Stance 13 2. Endorsement and Assessment of the Macroeconomic Forecasts 59 3. Assessment of Budgetary Forecasts 87 4. Assessment of Compliance with the Fiscal Rules 137 Boxes Box A: BEPS Reforms of International Tax Rules 27 Box B: What the Government’s medium-term strategy should do 56 Box C: The regional impact of Covid-19 on Ireland’s domestic economy 70 Box D: Updated Macroeconomic Scenarios to 2025 78 Box E: Covid-19 Support Measures 103 Box F: Seasonal Adjustment of Exchequer Tax Revenues 121 Box G: Policy Measures and Fiscal Scenarios 125 Box H: Covid-19, the structural balance, and one-off/temporary measures 145 Box I: Making the domestic fiscal rules more relevant 149 Appendices Appendix A: Timeline for Endorsement of Budget 2021 Projections 152 Appendix B: The Council’s Benchmark Projections 153 Appendix C: Tax Forecasts Decomposed 154 Appendix D: The Council’s Principles-Based Approach to the Budgetary Rule 157 3 Foreword The Irish Fiscal Advisory Council was established as part of a wider agenda of reform of Ireland’s budgetary architecture. The Council was initially set up on an administrative basis in July 2011 and was formally established as a statutory body in December 2012 under the Fiscal Responsibility Act. The Council is a public body funded from the Central Fund.
    [Show full text]
  • Designing Effective Independent Fiscal Institutions Designing Effective Independent Fiscal Institutions
    Designing effective independent fiscal institutions Designing effective independent fiscal institutions Independent fiscal institutions (IFIs) serve to promote sound fiscal policy and sustainable public finances. Their numbers in the OECD have more than tripled in the past decade and continue to grow. To- day IFIs are considered among the most important innovations in the emerging architecture of public financial management. The OECD has identified good practices for designing and operating effective IFIs through the OECD Recommendation on Principles for Indepen- dent Fiscal Institutions. The analysis presented in this paper draws on the OECD IFI database compiled from a first set of case studies of 18 OECD IFIs in Australia, Austria, Belgium, Canada, Denmark, Fin- land, France, Ireland, Italy, Korea, Mexico, Netherlands, Portugal, Slo- vak Republic, Spain, Sweden, United Kingdom and the United States. by : Lisa von Trapp and Scherie Nicol IFIs TODAY – New Institutions, new gov- forecasting, adherence to fiscal rules, 1 ernance challenges longer-term sustainability and han- dling of fiscal risks – may also be sup- Independent fiscal institutions (IFIs) are in- ported” through the work of IFIs. dependent public institutions with a man- date to critically assess, and in some cases Although relatively few and novel worldwide, provide non-partisan advice on, fiscal policy diverse examples of IFIs have existed for de- and performance. While fiscal decision-mak- cades within the OECD membership in coun- ing is ultimately the responsibility of demo- tries such as Belgium (1936), the Netherlands cratically elected officials, IFIs serve – often (1945), Denmark (1962), Austria (1970) and in combination with credible fiscal rules – to the United States (1974).
    [Show full text]
  • How Can Fiscal Councils Strengthen Fiscal Performance?
    From: OECD Journal: Economic Studies Access the journal at: http://dx.doi.org/10.1787/19952856 How Can Fiscal Councils Strengthen Fiscal Performance? Robert Hagemann Please cite this article as: Hagemann, Robert (2011), “How Can Fiscal Councils Strengthen Fiscal Performance?”, OECD Journal: Economic Studies, Vol. 2011/1. http://dx.doi.org/10.1787/eco_studies-2011-5kg2d3gx4d5c This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. OECD Journal: Economic Studies Volume 2011 © OECD 2011 How Can Fiscal Councils Strengthen Fiscal Performance? by Robert Hagemann* There is growing interest in the role of independent fiscal institutions, or fiscal councils, in helping to improve fiscal performance. This article provides some guidance on the scope for improving fiscal performance through fiscal councils based on the available literature and the range of fiscal institutions in the OECD countries. The effectiveness of fiscal councils hinges on several factors, including having full autonomy within the scope of their mandates, active and unfettered dissemination of their analysis, and their credibility. Experience and empirical evidence suggest that delegating macroeconomic forecasting to an independent fiscal council can indeed reduce forecasting bias. There is some empirical evidence that independent fiscal institutions can buttress a government’s capacity to comply with a numerical rule. Good fiscal institutions are a necessary condition for achieving disciplined fiscal performance. Experience demonstrates, however, that their existence is not sufficient. Without strong and sustained political commitment to a medium-term fiscal goal and, where relevant, to the mandate of a fiscal council, durable improvements in fiscal performance will remain elusive.
    [Show full text]
  • Finance Committee Inquiry Into Proposals for An
    FINANCE COMMITTEE INQUIRY INTO PROPOSALS FOR AN INDEPENDENT FISCAL BODY SUBMISSION FROM PROFESSOR CAMPBELL LEITH, UNIVERSITY OF GLASGOW 1. Many countries have adopted some form of independent central bank following the high inflation of the 1970s and economists’ analysis of the ‘inflationary bias’ problem, which suggested that governments’ desire to reduce unemployment would lead to high inflation without actually achieving the goal of lower unemployment.1 A similar development of economic ideas and real world events, are now informing similar moves to create fiscal councils in various countries. 2. Economists have brought together the analysis of public finances with that of Keynesian business cycles to describe how a benevolent policy maker should use fiscal policy to respond to economic shocks which affect the level of government debt.2 They highlight that the policy maker needs to trade-off the short-run costs of fiscal austerity against the long-run benefits of lower debt. The striking result from this analysis is that this balance is very fine – it is optimal to use fiscal policy to stabilise debt following shocks, but that returning debt to its pre-shock level should only be undertaken very slowly. 3. However, it is important to note that this result describes the policy that would be undertaken by a socially responsible policy maker who is able to make credible promises about how they will behave in the future. In the real world, fiscal policy is typically implemented by governments subject to the constraints of the political process. For numerous reasons this may result in a ‘deficit bias’, analogous to the ‘inflation bias’ discussed above, which can account for the rising government debt levels in many advanced economies over recent decades.
    [Show full text]
  • Fiscal Assessment Report, May 2021
    Fiscal Assessment Report May 2021 Looking beyond Covid-19 Foreword The Irish Fiscal Advisory Council was established as part of wider reforms of Ireland’s budgetary architecture. It was set up on an administrative basis in July 2011 and was formally established as a statutory body in December 2012 under the Fiscal Responsibility Act. The Council is a public body, with the terms of its funding set out in the Fiscal Responsibility Act. The Council’s mandate is to: • endorse, as it considers appropriate, the macroeconomic forecasts prepared by the Department of Finance on which the Budget and Stability Programme Update are based; • assess the official forecasts produced by the Department of Finance; • assess government compliance with the Budgetary Rule; • assess whether the Government’s fiscal stance set out in each Budget and Stability Programme Update (SPU) is conducive to prudent economic and budgetary management, including with reference to the provisions of the Stability and Growth Pact. The Council’s Chairperson is Mr Sebastian Barnes (Organisation for Economic Co-operation and Development). Other Council members are Prof. Michael McMahon (Professor of Macroeconomics at the University of Oxford and Senior Research Fellow of St Hugh’s College), Ms Dawn Holland (Visiting Fellow, National Institute of Economic and Social Research), Dr Adele Bergin (Economic and Social Research Institute), and Mr Alessandro Giustiniani. The Council’s Secretariat consists of Dr Eddie Casey, Mr Niall Conroy, Mr Kevin Timoney, Mr Killian Carroll, Ms Karen Bonner, and Dr Elliott Jordan-Doak. The Council would like to acknowledge the kind help from staff at the CSO, Central Bank of Ireland, ESRI, and the NTMA.
    [Show full text]
  • Do Fiscal Councils Impact Fiscal Performance?
    Ministry of Economy and Finance Department of the Treasury Working Papers N° 1 - March 2015 ISSN 1972-411X Do fiscal councils impact fiscal performance? Giovanni Coletta, Carmen Graziano, Giancarlo Infantino Working Papers The working paper series promotes the dissemination of economic research produced in the Department of the Treasury (DT) of the Italian Ministry of Economy and Finance (MEF) or presented by external economists on the occasion of seminars organised by MEF on topics of institutional interest to the DT, with the aim of stimulating comments and suggestions. The views expressed in the working papers are those of the authors and do not necessarily reflect those of the MEF and the DT. © Copyright: 2015, Giovanni Coletta, Carmen Graziano, Giancarlo Infantino The document can be downloaded from the Website www.dt.tesoro.it and freely used, providing that its source and author(s) are quoted. Editorial Board: Lorenzo Codogno, Mauro Marè, Libero Monteforte, Francesco Nucci, Franco Peracchi Organisational coordination: Michele Petrocelli Do fiscal councils impact fiscal performance? Giovanni Coletta(*),Carmen Graziano(**),Giancarlo Infantino(***) Abstract The lack of budget transparency and projections accuracy have been among the determinants of the last four decades high deficit and debt, as the recent 2008-2009 economic crisis has highlighted. In order to improve fiscal policy process and budget transparency, the European Union (EU) stated more stringent fiscal rules monitored by Independent Fiscal Bodies1, that have the capacity to “tie the hands” of policymakers tempted by deviations from socially optimal choices according to the academic circles. The present paper aims at empirically verifying if Fiscal Councils (FCs) in Europe (as a complement or substitute for the Fiscal Rules - FRs) have an impact on Governments’ fiscal decisions and if this impact exists and is positive which feature of their functioning is relevant for their effectiveness.
    [Show full text]
  • Independent Fiscal Councils: Watchdogs Or Lapdogs?
    January 2018 “Taxation without representation is tyranny.” From the premises of the or lapdogs? Independent Fiscal Councils: Watchdogs American Revolution to this day, the idea that control over the public purse rests with the People is a cornerstone of liberal democracies. Independent Yet, more than two decades after putting unelected central bankers in charge of monetary policy, many countries have recently established independent fiscal institutions (or councils). Unlike central banks, fiscal councils do not exert any policy responsibility: they only analyze, Fiscal Councils: comment, forecast, and advise. As watchdogs of fiscal sanity, they must bark at careless political masters, but they can never bite them. Frustration with fiscal policy rules as well as a sense of urgency in reaffirming commitments to sustainable public finances largely explain Watchdogs or the emergence of such institutions, particularly in Europe. Still, toothless or not, their effectiveness hinges on their ability to somehow constrain or guide policymakers. So, do independent fiscal councils (IFCs) silently lapdogs? carry the seeds of tyranny? And if not, why and how can they make any difference? Edited by Roel Beetsma and Xavier Debrun The essays in this book survey the motivations for IFCs, analyze their core features and effectiveness in varied institutional settings, distill elements of best practice, and discuss future developments. The consensus emerging from the book is that fiscal councils can be useful in fostering sound policies if they benefit from strong political ownership, protections against partisan pressures, resources commensurate to their tasks, and a well-defined mandate addressing country-specific threats to fiscal sustainability and stabilization. Contentious points remain, however.
    [Show full text]
  • Fiscal Policy After the Financial Crisis
    This PDF is a selecon from a published volume from the Naonal Bureau of Economic Research Volume Title: Fiscal Policy aer the Financial Crisis Volume Author/Editor: Alberto Alesina and Francesco Giavazzi, editors Volume Publisher: University of Chicago Press Volume ISBN: 0‐226‐01844‐X, 978‐0‐226‐01844‐7 (cloth) Volume URL: hp://www.nber.org/books/ales11‐1 Conference Date: December 12‐13, 2011 Publicaon Date: June 2013 Chapter Title: Fiscal Rules: Theorecal Issues and Historical Experiences Chapter Author(s): Charles Wyplosz Chapter URL: hp://www.nber.org/chapters/c12656 Chapter pages in book: (p. 495 ‐ 525) 12 Fiscal Rules Theoretical Issues and Historical Experiences Charles Wyplosz 12.1 Introduction The European sovereign debt crisis is an unwelcome reminder that no country can ignore the requirement of fi scal discipline. It should also clarify many issues on the nature of fi scal discipline and on the ways to achieve it. We knew it all, but a few aspects have been made more concrete. The crisis illustrates how slowly fi scal discipline can assert itself. Govern- ments can run budget defi cits for years, even decades, before fi rst facing the wrath of fi nancial markets and next facing their emergency lenders. This is illustrated for the Organization for Economic Cooperation and Develop- ment (OECD) countries by table 12.1, which shows the percent of years when a country has run a budget defi cit since 1960. This should happen about half of the time in a disciplined- government country, and indeed this is what is found for Denmark, New Zealand, and Sweden (Norway being a clear outlier because of its intergenerational saving into the Petroleum Fund).
    [Show full text]
  • Fiscal Analysis Is Darned Hard
    NBER WORKING PAPER SERIES FISCAL ANALYSIS IS DARNED HARD Eric M. Leeper Working Paper 21822 http://www.nber.org/papers/w21822 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2015 The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2015 by Eric M. Leeper. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Fiscal Analysis is Darned Hard Eric M. Leeper NBER Working Paper No. 21822 December 2015 JEL No. E52,E61,E62,E63 ABSTRACT Dramatic fiscal developments in the wake of the 2008 financial crisis and global recession led researchers to recognize how little we know about fiscal policies and their impacts. This essay argues that fiscal analysis that aims to address pertinent issues and provide useful inputs to policymakers is intrinsically hard. I illustrate this with examples torn from the economic headlines in many countries. I identify some essential ingredients for useful fiscal analysis and point to examples in the literature that integrate some of those ingredients. Recent methodological advances give reason to be optimistic about fiscal analyses in the future. Eric M. Leeper Department of Economics Indiana University 105 Wylie Hall Bloomington, IN 47405 and Center for Applied Economics and Policy Research and also NBER [email protected] FISCAL ANALYSIS IS DARNED HARD∗ Eric M.
    [Show full text]
  • FISCAL COUNCIL OCCASIONAL PAPER 1 the Business Cycle
    FISCAL COUNCIL OCCASIONAL PAPER 1 The Business Cycle, Potential Output and the Output Gap: Different Theories, Different Rules Ricardo Vicente July 2020 Eelarvenõukogu Estonia pst 13, 15095 Tallinn +372 668 0661 [email protected] www.eelarvenoukogu.ee Corresponding author´s e-mail address: [email protected] ISBN 978-9949-606-73-3 (pdf) The Business Cycle, Potential Output and the Output Gap: Different Theories, Different Rules Ricardo Vicente July 2020 Abstract This paper presents some fundamental macroeconomic concepts and discusses how they fit with the existing fiscal rules if alternative business cycle theories are applied, and it considers how those rules can be improved in general and in the specific case of the Estonian economy. This paper presents the views of the author and does not necessarily represent the views of the Estonian Fiscal Council or Eesti Pank. I am grateful to Martin Larch for making the EFB proposal clearer and to economists at Eesti Pank for their comments. The usual caveat applies. Index 1. What are these concepts in essence?.................................................................................................5 2. How do these concepts relate to the fiscal rules?..............................................................................5 3. Are there specific rules about the structural budget position?..........................................................6 4. Why do countries need fiscal rules?...................................................................................................6
    [Show full text]
  • Fiscal Councils in the European Union: Agents, Trustees Or Orchestrators of Fiscal Discipline?
    TARN Working Paper 03/2018 June 2018 ‘The troika is dead, long live the domestic troikas?’ Varieties of technocracy and the diffusion of national fiscal councils in the European Union: Agents, trustees or orchestrators of fiscal discipline? Tobias Tesche The Academic Research Network on Agencification of EU Executive Governance (TARN) is a Jean Monnet Network co-funded by the Erasmus+ programme of the European Union. twitter.com/EUtarn facebook.com/TheAcademicResearchNetwork TARN Working Papers (online) | ISSN: 2464-3270 http://tarn.maastrichtuniversity.nl/publications/tarn-working-papers/ Editorial team: Giacinto della Cananea, Law School, University of Rome Tor Vergata Morten Egeberg, ARENA Centre for European Studies, University of Oslo Michelle Everson, School of Law, Birkbeck College Johannes Pollak, Institute for Advanced Studies/Webster University Vienna Jarle Trondal, ARENA Centre for European Studies, University of Oslo Ellen Vos, Maastricht Centre for European Law, Maastricht University Series editors: Morten Egeberg and Jarle Trondal Issued by: ARENA Centre for European Studies University of Oslo P.O. Box 1143 Blindern 0318 Oslo, Norway www.arena.uio.no ‘The troika is dead, long live the domestic troikas?’ Varieties of technocracy and the diffusion of national fiscal councils in the European Union: Agents, trustees or orchestrators of fiscal discipline? Tobias Tesche Abstract This article shows that the troika institutions—the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF)—formed a technocratic consensus about the desirability of establishing national fiscal councils in the European Union (EU). Considerable disagreement existed, however, with regards to their design features. Each institution promoted a distinct mode of indirect gover- nance by ranking national fiscal councils depending on their adopted governance model (agent, trustee or orchestrator).
    [Show full text]